China Manufacturing Shrinks Faster in Threat to Europe

A worker assembles car doors for the Geely Automobile Holdings Ltd. Emgrand EC7 sedan on the production line at the company's factory in Cixi, Zhejiang Province, China. Photograph: Tomohiro Ohsumi/Bloomberg

June 20 (Bloomberg) -- China’s manufacturing is shrinking
at a faster pace this month, a trend that threatens to stem an
economic recovery in the euro area from the currency bloc’s
longest-ever recession.

A preliminary reading of 48.3 for the Chinese Purchasing
Managers’ Index released today by HSBC Holdings Plc and Markit
Economics compares with the 49.1 median estimate in a Bloomberg
News survey of 15 economists. In Europe, a composite index based
on a survey of purchasing managers in the services and
manufacturing industries rose to 48.9 from 47.7 in May, Markit
Economics said. While that’s the highest in 15 months, a measure
below 50 still indicates contraction.

China’s manufacturing weakness, along with a cash crunch in
the nation’s money market, will test how far Premier Li Keqiang
is willing to go in sacrificing short-term expansion for more-sustainable long-term growth. After record credit in the first
four months of the year failed to stoke growth, China’s State
Council, led by Li, said yesterday that the financial system
needs to do a better job of supporting the economy.

The China PMI Index “is a reminder that a strong euro-zone
export recovery is unlikely” to materialize soon, said Martin
Van Vliet, senior euro-area economist at ING Bank NV in
Amsterdam. “Any further recovery later in the year is likely to
be very slow and bumpy.”

Euro Stagnation

The 17-nation economy will stagnate in the three months
from April to June after six quarters of shrinking gross
domestic product, according to a Bloomberg News survey of
economists. It will grow 0.1 percent in the third quarter, the
same survey shows.

The European Central Bank expects the euro-area economy to
shrink 0.6 percent this year before expanding 1.1 percent in
2014. Recent economic survey data are showing “some
improvement, but from low levels,” ECB President Mario Draghi
said on June 18.

While the Frankfurt based ECB left its benchmark rate
unchanged at a record low of 0.5 percent in June, policy makers
stand ready to act further if economic conditions worsen, he
said.

Cash Crunch

China’s seven-day repurchase rate, which measures interbank
funding availability, rose 270 basis points, or 2.7 percentage
points, to 10.77 percent in Shanghai, according to a daily
fixing announced by the National Interbank Funding Center. That
was the highest in data going back to March 2003. The one-day
rate rose by an unprecedented 527 basis points to an all-time
high of 12.85 percent, a separate fixing showed. An intra-day
gauge of the one-day rate touched a record 30 percent.

“If market rates remain at such high levels, the only
scenario for the Chinese economy is a hard landing,” said Xu
Gao, chief economist with Everbright Securities Co. in Beijing.
“That possibility is growing now. It seems the leadership is
deliberately taking a wait-and-see stance to see how low China
growth can be.”

Authorities will boost credit support for industries the
government has defined as strategic and those that are labor-intensive, the State Council said yesterday after a meeting led
by Li, without identifying specific sectors. The nation must
also more firmly guard against financial risks, and bank lending
for projects in industries with overcapacity must be banned, the
State Council said.

Home Prices

If confirmed on July 1 in the final PMI reading, today’s
level would be the lowest since September. The National Bureau
of Statistics and China Federation of Logistics and Purchasing
will release their own PMI survey, with a bigger sample size,
the same day. The official PMI in May was 50.8, up from 50.6 in
April.

The preliminary, or flash PMI, from HSBC is based on about
85 percent to 90 percent of responses from more than 420
manufacturers.

Industrial production rose a less-than-forecast 9.2 percent
last month from a year earlier and factory-gate prices fell for
a 15th month, while export gains were at a 10-month low and
imports dropped.

At the same time, new-home prices rose at the fastest pace
in more than two years in major cities in May, constraining the
ability of policy makers to ease credit in response to weakening
economic growth.

Growth Downgrades

“Beijing prefers to use reforms rather than stimulus to
sustain growth,” Qu Hongbin, HSBC’s Hong Kong-based chief China
economist, said in a statement. “While reforms can boost long-term growth prospects, they will have a limited impact in the
short term. As such we expect slightly weaker growth” this
quarter, he said.

Yingli Energy (China) Co., a unit of the world’s largest
solar-panel maker, said June 13 that it will slow investments to
clear debt after facing anti-dumping duties in Europe.

Investment banks from Morgan Stanley to UBS AG this month
cut their estimates for China’s growth in 2013, and Barclays Plc
is estimating that expansion will slow to 7.4 percent, below the
government’s full-year target of 7.5 percent.

Economists forecast China’s gross domestic product will
expand 7.6 percent in the April-June period from a year earlier,
the median estimate of 35 respondents to a Bloomberg News survey
conducted from June 14 to 19. That compares with a 7.8 percent
median projection in last month’s survey and first-quarter
growth of 7.7 percent.

China Rates

Analysts also trimmed growth forecasts to a median estimate
of 7.7 percent this year, down from 7.8 percent projected in
May, and 7.6 percent in 2014, also down from last month’s 7.8
percent. The economy expanded 7.8 percent in 2012, a 13-year
low, and the government set a target for 7.5 percent growth in
2013.

Three out of 31 analysts expect a cut in the benchmark
lending rate this year, compared with two out of 27 in May’s
survey. Four out of 20 foresee a reduction in banks’ reserve
requirements in 2013, up from two out of 17 last month.